Venezuela Announces Sale of $5 Billion in PDVSA Bonds

Mérida, March 23, 2007 (venezuelanalysis.com)— On his radio program Aló Presidente Thursday night, President Hugo Chávez announced the launch of $5 billion in PDVSA bonds. The state-owned oil company, PDVSA, will sell these to the domestic market starting on Monday. Such bond issues have been met with strong demand and are meant to soak up excess cash in the economy and lower inflation.

"The bond is extremely solid because it is backed by of one of the most solid companies in the world, PDVSA," said Chávez last night, encouraging Venezuelans to invest. PDVSA will offer the bonds for 10, 20 and 30-year periods to all Venezuelan investors, but they will only be open for sale from Monday, March 26th to Thursday, March 29th.

"That’s just four days for you to make your offer," said Chávez, alluding to the high demand that previous bonds have been met with. The recently issued Bonds of the South were quickly bought up by investors and didn’t meet the high demand.

The oil company bonds, which are denominated in U.S.-dollars, are in high demand among Venezuelan businesses and individuals anxious to acquire the U.S. currency amid strict currency controls. Although the bonds must be bought in Bolivars, investors can resell the bonds in dollars and the interest is also paid in dollars.

The upcoming bond issue has been met with speculation that PDVSA is facing a cash flow problem and is turning to financial markets in search of capital. PDVSA has taken out loans this year with the intention of investing in higher oil production. The country hopes to raise the level of production from 3.3 to 5.8 million barrels per day by 2012.

But according to analysts, the main purpose of the bonds is to promote long-term savings in the economy. By promoting long-term savings inside the Venezuelan economy the government hopes to protect the country from fluctuations in the world economy. It appears that the state-owned oil company is looking for internal investment instead of relying on international financing.

"These bonds are oriented toward small, medium, and big domestic investors," said the president last night.

Other analysts have pointed out that the measure will serve to soak up excess cash in the economy, which could lower inflation rates and the black market exchange rate of Venezuela’s currency, which is currently valued at around Bs. 3.900.

Venezuela, with inflation at 17% for 2006, had the highest inflation in the region last year, mostly due to near-record social spending by the Chávez government, say analysts. The extra liquidity in the market has forced prices up and caused inflation.

Other analysts, such as Mark Weisbrot from the Center for Economic Policy Research, argue that another reason for the high inflation rate is the tremendous economic growth Venezuela has been undergoing for the past three years, at over 10% per year. “This rapid growth is the main cause of the inflation,” said Weisbrot in a letter to the New York Times today.

PDVSA President Rafael Ramirez, who announced the issue of the bonds Thursday night, reminded local media that PDVSA ranks as the third most important oil-sector firm in the world. "Our numbers are guaranteed by the financial results, which are excellent," asserted the minister. The conditions for the bonds will appear on Monday on the PDVSA and Venezuelan Central Bank websites.